AAR (AIR)

Aviation and defense services provider AAR CORP (NYSE:AIR) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 11.8% year on year to $739.6 million. Its non-GAAP profit of $1.08 per share was 9.8% above analysts’ consensus estimates.

Company Overview

The first third-party MRO approved by the FAA for Safety Management System Requirements, AAR (NYSE:AIR) is a provider of aircraft maintenance services

Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.

AAR’s competitors include General Dynamics (NSYE:GD) and Kratos Defense and Security (NASDAQ:KTOS)

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, AAR’s 8.2% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. AAR’s annualized revenue growth of 16.8% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

AAR also breaks out the revenue for its three most important segments: Parts Supply, Repair & Engineering, and Integrated Solutions, which are 43%, 29%, and 25% of revenue. Over the last two years, AAR’s revenues in all three segments increased. Its Parts Supply revenue (engine and airframe parts) averaged year-on-year growth of 15.2% while its Repair & Engineering (maintenance, repair, and overhaul services) and Integrated Solutions (fleet management) revenues averaged 30% and 11.4%.

This quarter, AAR reported year-on-year revenue growth of 11.8%, and its $739.6 million of revenue exceeded Wall Street’s estimates by 7.4%.

Looking ahead, sell-side analysts expect revenue to grow 2.5% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

AAR was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.4% was weak for an industrials business.

On the plus side, AAR’s operating margin rose by 1.5 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, AAR generated an operating margin profit margin of 8.8%, up 2.2 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

AAR’s EPS grew at an astounding 18.9% compounded annual growth rate over the last five years, higher than its 8.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into AAR’s earnings to better understand the drivers of its performance. As we mentioned earlier, AAR’s operating margin expanded by 1.5 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For AAR, its two-year annual EPS growth of 16.4% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q3, AAR reported adjusted EPS of $1.08, up from $0.85 in the same quarter last year. This print beat analysts’ estimates by 9.8%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

AAR broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that AAR’s margin dropped by 4.4 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

AAR burned through $53.6 million of cash in Q3, equivalent to a negative 7.2% margin. The company’s cash burn increased from $26.5 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

AAR historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.5%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, AAR’s ROIC averaged 1.9 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

AAR reported $80 million of cash and $1.1 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $337.2 million of EBITDA over the last 12 months, we view AAR’s 3.0× net-debt-to-EBITDA ratio as safe. We also see its $73.8 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly AAR blew past analysts’ revenue expectations this quarter. EPS also came in ahead. Zooming out, we think this was a solid print. The stock remained flat at $78.67 immediately after reporting.

Updated: December 4, 2025 at 10:20 PM EST

When considering an investment in AAR, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There are some positives when it comes to AAR’s fundamentals. First off, its revenue growth was decent over the last five years and is expected to accelerate over the next 12 months. And while its low free cash flow margins give it little breathing room, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders. On top of that, its projected EPS for the next year implies the company will continue generating shareholder value.

AAR’s P/E ratio based on the next 12 months is 18.2x. When scanning the industrials space, AAR trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $92.25 on the company (compared to the current share price of $84.09), implying they see 9.7% upside in buying AAR in the short term.